The Federal Reserve Continued Tapering, Changing its Forward Guidance to be More Vague

The Federal Reserve Board said that it would continue tapering its long-term asset purchases. As expected, the Federal Open Market Committee (FOMC) voted to reduce its monthly purchases of mortgage-backed and long-term securities from $65 billion to $55 billion, continuing to lower its bond-buying initiative by $10 billion with each meeting. These reductions began in December, when the Fed was still buying $85 billion in assets each month. Conventional wisdom holds that the Fed’s quantitative easing program will end by the third quarter of 2014.

The other major decision involved the 6.5 percent unemployment rate target that has been in the FOMC statement since December 2012. With the unemployment rate approaching 6.5 percent, it was widely anticipated that the Fed would change its forward guidance to stop mentioning an unemployment rate target altogether. In essence, the Fed would switch from “quantitative” to “qualitative” guidance. In its statement, the Fed said that it would continue to maintain its highly accommodative stance for some time, with the FOMC’s new goals somewhat vague in terms of data goals. It says:

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.

While the January FOMC minutes hinted that short-term rates might start to rise by year’s end if the economy grows sufficiently, economists have largely forecasted that the Fed funds rate would begin to increase gradually sometime in 2015. With that said, Federal Reserve Chair Janet Yellen suggested in her first press conference that short-term interest rates might rise around six months after quantitative easing ends. Financial markets interpreted this to be sooner than expected, sending equity markets lower.

There was one dissenter to the FOMC’s actions this time. Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, did not support dropping the unemployment rate target from the Fed’s forward guidance. He feels that unemployment remains elevated, and the Fed should continue its stimulative policies until the unemployment rate falls further. Specifically, the statement says that he felt that it “weakens the credibility of the Committee’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.”

In terms of economic forecasts, the Fed slightly lowered its predictions for growth in 2014. It now expects real GDP to increase between 2.8 and 3.0 percent, down from the 2.8 to 3.2 percent range stated three months ago. Weather-related softness has likely had a negative impact on these forecasts, particularly for the first quarter. On the other hand, employment was somewhat better, with the unemployment rate falling to as low as 6.1 percent in 2014 and 5.6 percent in 2015. Pricing pressures were expected to be minimal, staying below the Fed’s threshold of 2 percent for the next couple years. This year, core inflation should increase between 1.4 percent and 1.6 percent at the annual rate.

Chad Moutray is the chief economist, National Association of Manufacturers.

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.